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Brandon Roberts has been a member since April 19th 2012, and has created 309 posts from scratch.

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IPB 069: Look Harder Before You LEAP

 

Today's episode revolves around a discussion of the LEAP system and how it contributed to the revocation of an insurance agent's license.

An agent in Ohio had his insurance license revoked after using the LEAP system to sell life insurance as an investment. Now, this happened back in April 2016, so I wouldn't consider it breaking news, however, it's still a discussion worth having.

At the core of our episode…is LEAP the real problem (as depicted) or did the agent lose his license because the policies he sold were structured incorrectly?

The headlines and structure of the case documents themselves would lead you to believe that LEAP is the core of the problem but we're not so sure about that. You have to read between the lines on this one and look harder at the actual numbers revealed in the case to reverse engineer what REALLY happened.

Download the document from the Ohio Department of Insurance

Please note: This episode is not intended to disparage the use of LEAP or any other methodology for selling life insurance. We believe the actual problem in this case is that the former agent represented the life insurance as functioning one way and delivered something completely different.

In fact, if you want to better understand how this sort of thing actually happens, I encourage you to read a piece we published several years ago, The Third Dimension of Cash Value Life Insurance. It will shed some light on how this sort of thing happens.

IPB 068: Unsinkable Whole Life Insurance

 

We often hear stories of sorrow regarding evil life insurance companies.

Stories that depict how a person paid thousands of dollars in premium only to have the insurance company steal all their cash and cancel their coverage.

But does it really happen that way?

Anything is possible I suppose, however, when we took a look at a couple of whole life insurance policies that have not been paid as planned over the years we discovered something a bit different.

Turns out that participating whole life is indeed a special product that can “limp” along for years while the client pays a fraction of what was the initial planned premium.

Hmmm…that doesn't align with the stories of woe we see the media reporting, in fact, its pretty amazing.

But how and why does it work that way?

Listen to find out.

 

 

IPB 067: Should You Use Life Insurance to Diversify Your Retirement Income?

 

How could life insurance fit into your overall retirement income plan? That's what episode 67 is all about. For most people going forward, relying on pensions to form a stable foundation for their retirement will not be an option.

That means that most will be faced with two income sources:

  1. Social Security
  2. Income generated from investment portfolio (stocks, bonds, mutual funds, ETFs, real estate etc.)

Some have suggested that if you just follow the 4% rule everything will work out fine. We believe that's way oversimplified and fails to take into account the substantial risk posed by having significant drawdowns in your portfolio during the early years of your retirement.

Why not be a bit more selective in how you choose to take income and perhaps consider using cash value life insurance as a foundational component of the strategy?

IPB 066: Life Insurance Design Q&A

 

It's been a while since we've done any sort of FAQ episode. So, today we remedy that with three of the most commonly asked questions we get about life insurance policy design when seeking cash accumulation as your primary goal.

We answer the following questions:

  1. What is the 7 pay test and is it okay to fund my policy right up to the limit?
  2. If my policy illustration shows that my policy becomes a MEC in 52 years (for example) should I be worried when I'm only planning to fund it for 15 years?
  3. What's the worse case scenario if for some unknown reason I can't pay my premium in any given year? Does this ruin everything?

IPB 065: According to DALBAR Average Investor Results Are Below Average

 

Over the last few years…basically since the beginning of the Insurance Pro Blog going back to the summer of 2011, we've been preaching the gospel of whole life insurance.

Sure, there have been plenty of people who've come along to tell us how wrong we are and how a simple investment in an index fund could certainly outperform the return on the cash value of a whole life insurance policy.

To this, we've never disagreed.

Yes, in fact, we too believe that a long term investment in stocks or equity funds of any kind should…outperform the return on cash in a whole life policy. But that's kind of like us all agreeing we'd live a much longer and healthier life if we only ate raw vegetables and less prime rib smothered in butter.

Data is one thing, human behavior is another altogether.

Our point is that while average annual returns for various index funds and the indices themselves look great, most people aren't able to achieve returns anywhere close to those numbers.

Here's a more detailed rundown of the key points from the DALBAR report:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a
    margin of 4.70%. While the broader market made gains of 11.96%, the average equity
    investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor outperformed the Bloomberg
    Barclays Aggregate Bond Index by a margin of 0.19%. The broader bond market realized a
    slight return of 1.04% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased in 2016 from 4.10 years to 3.80 years.
  • Fixed Income retention rates increased by almost 2 months in 2016, from 2.93 to
    3.09, eclipsing the 3.0 year mark for the first time since 2012.
  • Asset allocation funds experienced the a significant decline of retention rates in 2016. The
    average retention rate shortened by over 5 months, decreasing from 4.53 to 4.09.
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for
    the Average Equity Fund Investor was only 4.79%, a gap of 2.89% annualized.
  • The gap between the 20-year annualized return of the Average Equity Fund Investor and
    the S&P 500 continued to contract in 2016 (from 3.52% in 2015 to 2.89% in 2016).

Just further proof that behavior rarely aligns with reality.

Psychology and emotion play a very large part in long term financial success. It's better to build a plan to “control the control-ables”. It's not sexy, it involves more planning and probably requires you to save more money because you're accepting a plan based on lower average returns.

But in the end, if you plan conservatively, and end up with more money, you'll be happier than if you over-project higher than average returns and miss your target. I've yet to have anyone complain that they had too much money.

You can't buy groceries with average annual returns. And averages also mean that half the people get less than average returns. How do you know you'll be average or better?

If we've done our job effectively and you feel like this is a concept that you'd like to explore for yourself, feel free to reach out to us, by contacting us here.

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